HP pays $108M to settle FCPA violations

Hewlett-Packard Co., based in Palo Alto, Calif., has agreed to pay $108 million and plead guilty to felony violations of the Foreign Corrupt Practices Act to avoid prosecution, the U.S. Justice Department and Securities and Exchange Commission announced last week.
HP's Russian subsidiary is accused of bribing Russian officials to secure a large technology contract with a government agency, as well as providing illegal benefits to win contracts with Poland's national police agency and Mexico's state-owned petroleum company.
“Hewlett-Packard subsidiaries, co-conspirators or intermediaries created a slush fund for bribe payments, set up an intricate web of shell companies and bank accounts to launder money, employed two sets of books to track bribe recipients, and used anonymous email accounts and prepaid mobile telephones to arrange covert meetings to hand over bags of cash,” Deputy Assistant Attorney General Swartz said in a statement. “Even as the tradecraft of corruption becomes more sophisticated, the department is staying a step ahead of those who choose to violate our laws, thanks to the diligent efforts of U.S. prosecutors and agents and our colleagues at the SEC, as well as the tremendous cooperation of our law enforcement partners in Germany, Poland and Mexico.”
According to court documents, in 1999, the Russian government announced a project to automate the computer and telecommunications infrastructure of its Office of the Prosecutor General of the Russian Federation (GPO). Not only was that project itself worth more than $100 million, but HP Russia viewed it as the “golden key” that could unlock the door to another $100 million to $150 million dollars in business with Russian government agencies. To secure a contract for the first phase of project, ultimately valued at more than €35 million, HP Russia executives and other employees structured the deal to create a secret slush fund totaling several million dollars, at least part of which was intended for bribes to Russian government officials.
As admitted in a statement of facts, HP Russia created excess profit margins for the slush fund through an elaborate buy-back deal structure, whereby (1) HP sold the computer hardware and other technology products called for under the contract to a Russian channel partner, (2) HP bought the same products back from an intermediary company at a nearly €8 million mark-up and paid the intermediary an additional €4.2 million for purported services, and (3) HP sold the same products to the GPO at the increased price. The payments to the intermediary were then largely transferred through a cascading series of shell companies -- some of which were directly associated with government officials -- registered in the United States, United Kingdom, British Virgin Islands and Belize. Much of these payments from the intermediary were laundered through off-shore bank accounts in Switzerland, Lithuania, Latvia and Austria. Portions of the funds were spent on travel, cars, jewelry, clothing, expensive watches, swimming pool technology, furniture, household appliances and other luxury goods.
To keep track of these corrupt payments, the conspirators inside HP Russia kept two sets of books: secret spreadsheets that detailed the categories of recipients of the corrupt funds and sanitized versions that hid the corrupt payments from others outside of HP Russia. They also entered into off-the-books side agreements. In one instance, an HP Russia executive executed a letter agreement to pay €2.8 million in purported “commission” fees to a U.K.-registered shell company, which was linked to a director of the Russian government agency responsible for managing the GPO project. HP Russia never disclosed the existence of the agreement to internal or external auditors or management outside of HP Russia and conducted no due diligence of the shell company.
HP's Polish subsidiary is accused of falsifying its books and records and circumventing HP internal controls to execute and conceal a scheme to secure and maintain millions of dollars in technology contracts with the Polish National Police agency. HP Poland made corrupt payments totaling more than $600,000 in the form of cash bribes and gifts, travel and entertainment to the KGP’s Director of Information and Communications Technology. Among other things, HP Poland gave the government official bags filled with hundreds of thousands of dollars of cash, provided the official with HP desktop and laptop computers, mobile devices and other products and took the official on a leisure trip to Las Vegas, which included drinks, dining, entertainment and a private tour flight over the Grand Canyon. To covertly communicate with the official about the corrupt scheme, an HP Poland executive used anonymous email accounts, prepaid mobile telephones and other methods meant to evade detection.
In Mexico, according to the non-prosecution agreement, HP Mexico falsified corporate books and records and circumvented HP internal controls in connection with contracts to sell hardware, software and licenses to Mexico’s state-owned petroleum company, Petroleos Mexicanos (Pemex). To secure the contracts, HP Mexico understood that it had to retain a certain third-party consultant with close ties to senior executives of Pemex. HP agreed to pay a $1.41 million “commission” to the consultant and hid the payments by inserting into the deal structure another third party, which had been approved by HP as a channel partner. HP Mexico made the commission payment to the channel partner, which in turn, forwarded the payments to the consultant. Shortly thereafter, the consultant paid one of the Pemex officials approximately $125,000.
The government said HP has provided extensive cooperation to investigators and taken remedial action to curb corruption, including taking disciplinary action against culpable employees and enhancing its internal accounting, reporting and compliance functions.
"Hewlett-Packard lacked the internal controls to stop a pattern of illegal payments to win business in Mexico and Eastern Europe. The company’s books and records reflected the payments as legitimate commissions and expenses,” said Kara Brockmeyer, chief of the SEC Enforcement Division’s FCPA Unit. “Companies have a fundamental obligation to ensure that their internal controls are both reasonably designed and appropriately implemented across their entire business operations, and they should take a hard look at the agents conducting business on their behalf.”
"The misconduct described in the settlement was limited to a small number of people who are no longer employed by the company,” John Schultz, HP's executive vice president and general counsel, said in a statement. “HP fully cooperated with both the Department of Justice and the Securities and Exchange Commission in the investigation of these matters and will continue to provide customers around the world with top quality products and services without interruption.”